How Dividends are Accounted for in Spread Betting


Q. When are dividends paid out?

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A: If you own shares in a company you also have the right to receive dividends which usually take the form of a cash payment. Dividends are paid quarterly, bi-annually or on an annual basis. In practice dividends usually consist of two payments; an interim (consisting of about 25% to 40% of the full-year dividend for the year) and a final (representing 60% to 75% of the full-year dividend for the year). Dividends are split in these ratios because the interim dividend is released mid-yearly and is based on unaudited figures so comes with a greater degree of risk for the company. On the other hand the final dividend is based on audited numbers and will provide a good indication of how the company has fared during the year.

Q. When buying shares how long do I need to hold them to receive the dividend payment?


About shares trading (not spread betting). When do I need to have bought a share and how long do I need to hold it for to receive the dividend payment? I presume I must buy before the Ex-Div date and hold until after the record date. But do I then need to hold until the actual payment date or not?

A: Yes, you must buy before Ex date but you don't have to hold till record date. You can sell the next day and you are still entitled to the dividend. That's what ex dividend means - without dividend. So if you hold the day before ex day and sell on ex day the div is yours. But remember on ex day the share usually falls in the market to match the dividend payment. Note that all UK dividends are paid close of business every Tuesday.

Taxes: Note that in the UK dividend payments incur a 10% tax which is charged by the Government before you receive it. Additionally, higher-rate payers are taxed an extra 25% on the amount received, which adds up to an effective tax rate of 32.5%.


Q. Great website, but as a side note though, what about the dividends you will go without? If a company awards shares over cash, does your position increase? My guess is that it won't (but I'm not 100%)

A: Dividends - The morning after a share goes ex-div the price of the share will drop approximately by the amount of the dividend. Regarding how dividends are accounted for in spread betting, it would depend on what type of contract you were thinking of trading.

One common question investors and traders ask is 'do I receive dividends when buying a spread bet?' The simple answer to this question is 'yes'. However, there are a few things to keep in mind as spread betting are a derivative contract between the spread betting provider and the buyer or seller of the spreadbet. The holder of the spreadbet does not technically own the underlying share over which the spreadbet is based and as such the treatment of dividends is a bit different to what most investors would have become accustomed to when buying and selling shares.

Dividends: Rolling Bets vs Futures

Rolling bets would have dividends credited to your spread betting account by your broker the day that they come into effect. However with future contracts, e.g. September - these would have the dividends already calculated in their price, therefore there would be no need for any dividend adjustments to be added or subtracted on your account. In other words for futures bets, if a company is likely to go ex-dividend before your bet expires, the spread betting provider will often adjust the price of the bet by building the value of the estimated net dividend into the price you are quoted.

Dividends

Example of credit Dividend adjustment for WMH (William Hill) Rolling Daily.

Dividends: Rolling Bets

Dividend adjustments are credited to long positions and debited from short positions held at the close of business on the day before the ex-dividend date. If you have a long position on a share spread bet contract you will receive a credit payment on your account on the evening before the share goes ex-dividend. This works in a similar way to if you physically owned the shares and it is done on a pro-rata basis calculated on how long you have held the position for. If you are long, you will receive 80% to 90% (depending on the spread betting company) of the dividend and if you are short, you will be debited 100% of the dividend. You will see in the annual interest column that sometimes it is less than 4.75%. This is the effect of the dividend to be paid - the quotes are lowered to reflect this. Some deals show negative interest - this is where the dividend due outweighs the interest charge.

For example if you were long £1 a point in Barclays you would receive the equivalent credit as if you owed 100 shares. This payment is made as the equivalent net payment you would receive where 20% tax is deducted at source on a dividend. If you have a short position a debit would be made on your account for the full gross amount.

Let's take another example involving Cantor. Cantor pays 80% of dividends on shares which is incorporated into Cantor's spread bet price. Example, if Tesco's cash price was 369 to 369.5 and there was an expected dividend to be paid of 4.2p in October, Cantor's spread bet quote for December would be to 365.4 to sell and 369 to buy.

Also, when companies within an index go ex-dividend this will affect the value of the index and therefore similar adjustments are made for clients holding Rolling Daily bets in the index.

Dividends: Quarterly and Futures

Prices for quarterly contracts already include the dividend. Thus on the day the share goes ex-dividend, the cash price of the underlying should fall by the amount of the dividend (all other things being equal). However, since the quarterly price has already been adjusted, it will not change. Thus, rather than receiving a cash payment into their account, long position holders are protected from the fall in the cash price, thereby receiving the benefit of the dividend (minus tax). Conversely, clients with short positions will not benefit from the same fall in the cash price, thus essentially paying the dividend.

A good way to illustrate the treatment of dividends is to look at prices on a spread betting provider's site; where you see the cash price at a higher level than a futures contract or a March price trading at a similar or lower level to a September or December price, then a dividend adjustment will be factored into the broker's future price as compensation. (Obviously, a future price would normally be higher than the cash due to the addition of funding to expiry). Looking at United utilities for example; cash = 453.5, Dec = 458.1, Mar = 450.1. If the dividend paid is different to the spread betting bookie's predicted adjustment, then a cash amount will either be credited or debited from the client account. More information on how Dividends are covered is available here

Dividends from spread trades are paid on the full market exposure. For instance if you buy the equivalent of £10,000 and it only requires £500 to open this trade, the dividend paid is on the £10,000 worth of shares.

Q. I still can't understand how dividends are accounted for in spread betting?

A: Let's take the case of Barclays PLC

Suppose you own shares in Barclays PLC which pays out two dividends each year; in this case let's assume one dividend in February of 15p net, and another one in August of 18p net. This would give a total return of 33p per share.

If you had bought Barclays at 380p in January 2008, this 33p return would represent an 8.68 return and this income would be taxable at the prevailing income tax rate which leaves you with a 7.12 per cent return (based on an 18% tax bracket).

On the other hand if you had held Barclays PLC in the form of a spread bet, you would have received the full 8.68% indirectly in the form of a capital gain (as opposed to an income) and therefore free from any tax.

Here's how the accounting compares (commissions and financing having been removed for simplicity but are equal in both examples):

Share purchase:

  1. You buy 1,000 shares in Barclays PLC at 380p in January 2008
  2. You receive a 18p dividend in August, and a 15p dividend in February
  3. You sell 1000 shares in Barclays PLC at 380p in January 2009
  4. Capital gain = zero
  5. Income received = £330 or £270.6 after income tax

Total Gain: £270.6

Spread bet:

  1. You buy £10 per point of Lloyds at 367p
  2. No dividends received because the purchase price was already discounted by 33p
  3. You sell £10 per point at 400
  4. Capital gain = £330 (tax-free)
  5. Income received = zero

Total gain = £330

Q. But why do most spread betting providers pay out only 80% of dividends?


I've always thought that the spread betting providers pays the remainder to the government as tax?

A: Most UK spread betting firms pay 80% to 90% of the dividend if you are in a long position. The reason that only 80% is paid out to clients holding long positions (and not the full 100%) is that you would be charged income tax on a dividend if you received this in reality.

What's the justification for this?

They can't let clients avoid tax in this way? More profit for the spread betting providers? (some justify only paying 90% as they say they have to pay a 10% withholding tax on the underlying position they are holding to hedge your position - in reality we know it is unlikely that they are actually holding that position, unless you are dealing in very big size or are on their "A-book" of winning clients - but this is the reason you might hear from most providers). And even then my understanding is that providers do not pay the remainder as tax as they are a member of the LSE and are therefore not charged this.

Here's what Spreadex had to say -:

'While some spread betting companies pay just 80% on long UK equities positions and debit 100% on short UK equities positions, at Spreadex we pay out 90% of the total dividend payment on these long trades and debit only 90% on these short trades.

The reason we pay out 90% instead of 100% is due to a 10% UK withholding tax which is placed on all UK dividend payments. This 10% tax is placed on both long and short positions, therefore if you hold a long position you will be credited with 90% of the dividend and if you are short you will be debited with 90% of the dividend.

For example if on 23rd December, 2011 you took out a long £100 a point position in BT and held it until 30th December, 2011 then you would be entitled to the dividend payment on 28th December, 2011 of 2.8889 pence per share. A position of £100 a point is equivalent to 10000 shares so you would receive gross £288.89. Once the tax has been applied your account would be credited with £260. If you were short of the stock you would be debited this amount. In the above case the client would be credited £231.11 if long and debited £288.89 if they are short.'

Interestingly spread betting provider IG Index also pays out 90% of the dividend amount on uk stocks while Ayondo pay the full 100%. The dividend cash amendment is calculated as follows:

Number of shares held x dividend = amount received or debited

In order to ascertain how many shares the size of your bet (amount per point) equates to, simply multiply the amount per point you are trading by 100 (assuming the currency you are betting in is the same currency as the share quoted in the underlying market). For example, a £5 per point bet would replicate the exposure of trading 500 shares. As we quote UK shares in pence, a one-point movement is a one-pence movement.

Q. If spreadbetting is tax free and as you said, you are not trading the underlying market, but a 'shadow market', then why do I have to pay a 20% tax on dividends, since this is not a real dividend from the company?

A: This was answered by Angus, market commentator. 'The 20% is withheld to prevent clients from trying to avoid tax. For example, if we paid 100% of the dividend then a client who held the underlying stock could sell their investment and buy the equivalent in a spread bet the day before ex-div, then the day after, sell the spread bet and buy back the underlying and they would have received 100% of the dividend via their spread bet. As a result we withhold 20% to prevent clients from doing this.'

If a spread betting company credits a client with 100% of the dividend then they have the ability to avoid tax. For example, a client who owns 100,000 shares of a stock paying a 5p div could do this around the ex-div date:

  1. Sell the 100,000 shares on the day before ex-div and buy £1000 per point in a spread bet;
  2. Receive £5000 as a credit for the dividend from the spread betting company the next day;
  3. Sell the spread bet and buy back the stock.

This way the client has made 100% of the dividend and avoided paying any tax. Different spread betting firms have different policies towards crediting and debiting of dividends and Capital Spreads is 80%.

Q. I know that spread betting providers only pay 80% to 90% of dividends - who gets the remaining 10% or 20% - the providers? the government?

A: This was answered by a senior trader at Spreadex -:

"The money comes from the companies themselves who pay out the dividends. The amount in full goes to the bank we hold the shares with who pay the 10% tax on it. We therefore see 90% of the total dividend payment from our brokers which we mirror in full to the clients who hold positions in the companies on the ex-date."

"By paying 90% of the total dividend payment we are making zero profit on dividends. We pay out the exact mirror payment that we receive through holding positions in the companies ourselves. Spread betting firms who pay only 80% to clients who are long and deposit 100% off those who are short are making a profit in doing so as predominantly clients go long in shares, thus they are profiting on the difference. The remaining 10% in paid as withholding tax by the bank we hold the shares through."

Many traders tend to open short positions in the expectation of the share price falling more than the dividend amount. Spread betting companies deduct dividends by applying a debit to client short positions so it is not possible to go short in the expectation of a sharp drop due to the dividend going ex as you will pay the dividend amount to the spread betting provider.

Q. Opened at 174 at 15 a point. Cash price at 200. So why isn't my gain showing as (200 - 174) x 15??

I opened a 15 point Sept long position on Bradford & Bingley at 174. However now I'm seeing the cash price of the security at 200 at my broker. So how it that my gain is only showing as £135.60 instead of £390 [i.e. (200 - 174) x 15 points]!? Price to sell is showing at 184.5.

A: This is what we have been discussing above. When you originally placed the spread bet you bought it at a discounted rate to what it was trading in the underlying market. The September spread bet price is discounted to reflect the dividends payments which are due to be paid out within the lifetime of the bet. On 19th March 14.3p is due to be paid out as dividends for Bradford & Bingley and on August 20th another 6.7p per share is due to be paid out.

As you don't receive these dividends for quarterly spread bets your spread betting provider has reduced the price by this combined amount - this is the reason that their price is currently lower than the cash price. Also, since you opened the bet the shares has gone up approximately 10p.

Q. When a company unexpectedly announces either a dividend cut or that it is not paying a dividend at all (as is happening more and more in the current climate) what happens to the spread betting price?


Am I right in thinking that aside from any change caused by the markets reaction to the news, if you have a long position it should rise? If that's correct what happens if you are short and why?

A: When there is a change in the expected dividends, the spread betting provider will merely reflect this by altering their price and the price of any open positions. So if dividends are reduced they will reduce the amount of dividends in the price, therefore raising the price. It is important to note that all open positions; be they long or short will also rise.

Q. I called to ask 'IG work out their FTSE price differently than us'...40 points difference???!!

A: If you were watching IG then you were watching the 'Cash' price with an expiry for Wednesday's close of business which would obviously have the dividend deducted since 'Daily Cash Wednesday' has finance and xd (xd = X Dividend) discounted in the current price.

You were comparing this with a 'Rolling Cash' product which, depending on which platform you use, gets 'Rolled' at a specific time. For instance Capital Spreads 'roll' their markets after the close. This means that Wednesday's xd wouldn't get deducted until the market shut at 9pm Tuesday evening at which point, if you were short, you would get 31 x stake deduced from your account which you would effectively get back once the FTSE gapped lower the next morning. Likewise, if you were long, you would get the dividend paid into your account (although I believe Capital only pay 80% of dividends) - You would of course suffer the 31 point drop on your position when the market reopened.

So the answer to your question is one of 'determination date'. Always be aware of this on a Tuesday evening since FTSE goes ex dividend on Wednesday morning at the open.

Note that when you have a short position on the FTSE 100, you will have to pay a dividend for being short of the FTSE (this usually happens on Wednesdays when dividends are paid out). This dividend amount is computed by the spread betting provider as a basket of the shares in the index that are going ex-dividend that week.

Q. I'm aware that dividends are paid out on FTSE rolling daily positions but are these also paid on the Dax rolling daily? - if not why not?


A: The DAX Index is a total return Index which means that when a dividend is paid the price of the DAX gets adjusted by the number of points that it fell. In other words any dividends paid on the constituent elements are assumed to be reinvested into the Dax index, as it is a total return index. Note however that the dividend is paid out on individual shares within the DAX.

This is what ETX Capital had to say on its policy on index dividend adjustments :

'Any daily rolling index position held on account after market close the day before an ex dividend event is adjusted for the weighted effect of any stock dividend within that index. The index dividend adjustment is obtained from external financial data sources, eg Bloomberg or Reuters.

The Germany 30 index is not adjusted by ETX for index dividends as the underlying index (DAX 30) is a total returns index where dividend events are automatically reflected in the price. Index Future markets are not affected by ex dividend events as any anticipated future dividends are already reflected in the price.'

 ...Continues here - Stock Splits and Consolidations


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